4:17pm: Fed unlikely to raise rates by 75 basis points again, Miramar Capital founder said
The Dow closed Thursday up 332 points, 1%, at 32,530, the Nasdaq Composite added 130 points, 1.1%, to end at 12,163 and the S&P 500 improved 49 points, 1.2%, to 4,072.
Today's rally continued an upward swing that accelerated yesterday when the Federal Reserve raised interest rates by 75 basis points but Jerome Powell hinted that another hike of that magnitude isn't likely to be in the cards.
“The attitude is basically that the Fed is saying we’re near the end, and that the GDP number is telling people there is no compelling reason for the Fed to hit us with another 0.75 or 1 percentage point,” Max Wasserman, senior portfolio manager and founder of Miramar Capital, said, according to CNBC. “The Fed may be still raising interest rates a little bit, but we know they’re not going to keep raising at the same level.”
12:05pm: US stocks shake off recession talk, but eye GDP report
The major US indices were in the green around midday, as investors eyed the latest weak US Gross Domestic Product report, but remained happy with the less-aggressive approach by the Fed on interest rates.
The Dow Jones Industrials Average was up at 0.6% at 32, 397 points, the S&P 500 was up 0.6% at 4,047, and the Nasdaq Composite was up 0.4% at 12,075.
OANDA senior market analyst Craig Erlam noted that US Federal Reserve chair Jerome Powell and his colleagues, “went for a cocktail of hawkish data dependency with a dovish twist. It doesn't take a genius to work out which part investors lapped up.
“So investors are happy as they no longer have to fear such an aggressive tightening cycle that may tip the economy into recession as it's already in a technical recession (not to be confused with a real recession, obviously) and the threat to the economy is already such that the Fed will be able to take a less severe approach," Erlam said.
Equiti Capital market analyst David Madden agreed with this sentiment, pointing out that “the Fed revealed that it might look to scale back the size of the increases. The fact it even mentioned smaller rate hikes, could be a sign we are over the peak of the hiking cycle.”
Madden also noted that the US greenback is, “taking a beating because of the Fed’s signal. Earlier today, the currency had recovered most of the ground it lost from last night, but the GDP figure brought the bears back into the equation.”
At midday, the major movers on the S&P 500 included Constellation Energy up 17%, but Cincinnati Financial falling by 13%. Nasdaq saw Align Technologies up by 6% but Comcast Corporation down by 9%. On the Dow, Honeywell International was up 3.6% but Travelers Companies was down 2.7%.
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9.35am: US GDP shrinks for second quarter in a row
US stocks opened higher as new data from the Bureau of Economic Analysis (BEA) has shown that the American economy shrank for the second consecutive quarter.
Just after the open, the Dow Jones Industrial Average had added 86 points at 32,284 points, while the S&P 500 was up 13 points at 4,037 points and the Nasdaq Composite had gained 44 points at 12,076 points.
According to an advance estimate by the BEA, the US gross domestic product (GDP) decreased at an annual rate of 0.9% in 2Q 2022, an improvement on the 1.6% GDP decrease reported 1Q but significantly below the market forecast of 0.5% growth.
“The smaller decrease reflected an upturn in exports and a smaller decrease in federal government spending that were partly offset by larger declines in private inventory investment and state and local government spending, a slowdown in personal consumption expenditures, and downturns in nonresidential fixed investment and residential fixed investment. Imports decelerated,” the BEA noted.
BRI Wealth Management chief investment officer Dan Boardman-Weston noted that the latest GDP data put the US in what analysts call a technical recession. “The economic outlook looks increasingly gloomy and is likely to deteriorate during the remainder of 2022,” he said.
“This may be why the Fed seemingly adopted a slightly more dovish tone yesterday, as they recognize that some of the heavy lifting on bringing inflation down may have been completed and that they may need a slightly more supportive policy position for the economy.”
Meanwhile, Facebook’s parent company Meta Platforms Inc (NASDAQ:FB) was down more than 6% at the open after the company posted its first-ever year-over-year revenue decrease with the release of its 2Q earnings after the bell yesterday.
6.30am: Data and earnings eyed
US stocks were expected to open lower on Thursday ahead of key US GDP data and more earnings news from corporate America, a day after the Federal Reserve delivered a much-anticipated 75-basis point rate increase.
Futures for the Dow Jones Industrial Average were trading 0.2% lower pre-market, while those for the broader S&P 500 index were down 0.3%, and futures for the tech-laden Nasdaq-100 shed 0.7%.
“US GDP could well print a second negative quarter this evening, but forecasts vary widely,” said Jeffrey Halley, senior market analyst at Oanda.
“Perversely, a negative print will probably see another stock market rally and US Dollar sell-off in the context of the price action overnight,” he added.
Second quarter GDP for the world’s biggest economy is expected to show a small growth after a drop in the first three months of the year, technically avoiding a recession.
The US Federal Reserve delivered a 75 basis point rate increase after its latest policy meeting on Wednesday as it seeks to rein in inflation, bringing an element of certainty to markets. The latest hike took the short-term US borrowing rates to between 2.25% and 2.50%
“The fact is the message is clear from Fed now, and that is they want to bring the inflation lower no what the cost is. Although, they are trying their best to avoid a recession,” said Naeem Aslam, chief market analyst at avatrade.com.
“Jerome Powell, like Janet Yellen and President Biden, said that the US economy isn't in a recession. This is purely on the basis of the new definition of recession which doesn't define a recession as two consistent quarters of negative growth,” he added.
Looking ahead, Aslam noted that market players expect a smaller rate hike in September.
“Traders expect the next interest rate hike to be around 50 basis points, and the one after that will be around 25 basis points. The important point here is that investors and traders would like to see the Fed assess the situation more carefully and not set the monetary policy on autopilot. Putting anything on autopilot could be extremely dangerous for the US economy," he concluded.
On the earnings front, quarterly results from Pfizer and Mastercard are due during the session today, along with tech heavyweights Amazon and Apple after the markets close, and will provide further market direction.
Contact the author at jon.hopkins@proactiveinvestors.com